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Guide to Planning Retirement Finances

Introduction

One of the most important things that we can do as
we progress through our working life is to plan for our retirement. Many of us
will live well into our 80’s, 90’s and even100’s and, unless we want to work
until we drop, we need to plan for our retirement. Planning involves thinking
about both finance and the lifestyle that we want to lead in our retirement. The
two are linked because unless we have an idea of what we want to do, we won’t
know how much money we will need to fund it.

This section of our Retirement Planning Guide
focuses on the financial side of planning for retirement but remember that it is
inextricably linked with what you plan to do in retirement and how you want to
live.

How long a retirement do
we want?

Retirement has changed considerably with each
passing generation. Those retiring now can expect 25 years or more of retirement
and typically a much more healthy and active one than their parents would have
had.

In the coming years the whole nature of retirement
is likely to change due to both further increases in longevity and because of
increased pressure on finances, in particular through the closure of many
employers’ Final Salary schemes and replacement with Defined Contribution
schemes. The removal of the default retirement age back in 2011 means that we
can no longer be forced to retire, so we can in theory work for longer if we
want to. However, few of us want to work until we drop, so we do need to think
about how long we hope to spend in retirement and plan accordingly.

One thing that we expect to see over time, because
of increasing longevity, finance pressures and employer action, is more phased
retirement where we gradually cut down the number of days a week we work. From
surveys we have done at LaterLife most people would be happy to trade this
ability to gradually cut down in return for working longer and indeed it can be
much more enjoyable than going from working full time to stopping completely.

However, in terms of planning, it is easiest to
have in mind a target age for full retirement and then closer to the time decide
whether we want to phase it. Traditionally, most people plan around either the
State Pension Age (currently changing to 66 but likely to rise over time in line
with increasing longevity) or the ‘Normal Retirement Date’ of their company
pension scheme.

The one benefit of increasing longevity, if we
think in terms of say 25 years of retirement, is that there is a longer period
of working to save for those 25 years.

How much money do we need
in retirement?

How much money we need in retirement will depend
very much on what sort of lifestyle we envisage for ourselves in retirement. Our
day to day living expenses will hopefully go down e.g. mortgage paid off, kids
off our hands, no travel costs to work etc. However, if we plan to take that
trip of a lifetime, or have expensive hobbies we want to pursue then we need to
allow for that.

Traditionally, many Final Salary Schemes (in which
we get a pension related to our salary and the number of years we have been in
the scheme) were planned on the basis of achieving a pension of 2/3 of final
salary if full contributions had been made over 40 years. So this may be a
benchmark you want to use. Alternatively you might want to think in terms of a
specific target salary based on what that would buy today and then adjust that
for inflation over the intervening years.

Also take into account that most schemes allow 25%
of the pension fund built up to be taken as a tax free lump sum. This can be
useful for providing for major purchases on retirement e.g. a new car, paying
off the mortgage, that trip of a lifetime etc. However, that reduces the overall
pension you might otherwise get, so needs to be considered carefully when the
time comes (see our Guide to Lump Sums).

The rest of the Guide covers the other aspects of
planning your retirement finances. We suggest you read through the whole guide
to gain a general understanding and then work through the appropriate sections
to develop your personal ideas.